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Local investment edges down

Analysts blame policy uncertainty and recession

Rejaul Karim Byron
The country has been experiencing a drop of around 0.03 percentage points in investment, both public and private, for the last three years, Bangladesh Bureau of Statistics says.
During July-December of the current fiscal year, the central bank data show, industrial termloan disbursement, a main indicator of investment scenario, also slowed around 8 percent.
Economists blame transitional political situation, policy uncertainty and global economic recession for this low investment.
This fiscal year's investment rate came down to 24.18 percent of the gross domestic product (GDP) from 24.21 percent a year earlier. Of this, private-sector
investment slightly increased by 0.30 percentage points and stood at 19.55 percent of GDP, which was 19.25 percent last fiscal year.
The public investment dropped by 0.32 percentage points and stood at 4.63 percent of GDP from 4.95 percent a year earlier.
Overall investment has been showing a downward trend since FY 2005-06, when it was 24.65 percent of GDP.
The data on industrial term credit show that disbursement of such loans fell 7.48 percent to Tk 8940 crore in the first six months this fiscal. The figure was Tk 9636 crore last fiscal, 64 per cent up compared to the same period of the previous year.
In the first nine months, opening of letters of credit for the import of capital machinery marked a 32 percent drop.
Bangladesh Bank officials said investment is falling due to gov-
ernment's failure in implementing the annual development programme (ADP). Every year the original ADP is slashed and only 80 to 85 percent of the revised ADP implemented.
Pointing to Bangladesh's low investment rate, Zahid Hossain, senior economist of World Bank Dhaka office, said it hovers around 40 percent of GDP in emerging economies like India and China. Bangladesh needs to raise the total investment rate to at least 34 percent of GDP in the next three years in order to accelerate its GDP growth rate to the 8.5 to 9 percent range for becoming a middle income country next decade, Hossain opined.
He also put emphasis on its efficiency to reap maximum return from scarce capital resources. With declining GDP growth rate in the last four years, the efficiency of investment, as
measured by the Incremental Capital Output Ratio (ICOR), has declined.
However, Hossain said despite poor infrastructure, Bangladesh economy has been weathering several uncertainties since the last half of 2006.
He said the FY07-08 transitional political situation dented investor confidence, associated by policy
uncertainties and the ongoing global recession. All these have fuelled a high level of risk aversion, the economist pointed out. Added to that is the high cost of finance as well as high transactions costs that investors have to face in doing business here.
On boosting investment, he suggested three measures. Firstly, raising public investment will
ensure adequate supply of energy and infrastructure services, particularly roads and ports.
Besides, an improved law and order can provide a secured environment for investors, Hossain added.
"And the last but perhaps not the least, the investors need a credible and predictable medium-term policy framework that will enable them to assess the rate of return to prospective investments. Risk aversion is inherent to human nature. That does not mean people do not take risks," the noted economist said
When it comes to investment behaviour, particularly investment in long term fixed assets, risk aversion turns into risk avoidance, if investors are unable to make a reliable assessment of the level and variability of returns to investment, Zahid Hossain observed.